The Extended Tax Deadline is Upon Us! Here Are 7 Ways to Get it Right

Why does doing your taxes seem like such a bummer? Well, there’s math involved, and tax forms that seem designed by counter-intelligence experts to induce panic attacks, and the stakes feel high. Is there a nice refund coming down the pike or will I accidentally make an error that will erase all my savings and possibly land me in tax jail? (Also the worry: is there tax jail?)

We can’t alleviate all of your fears (there will still be numbers involved!), but we can give you some advice that’ll make the really crucial stuff feel easy.

What’s the most unnecessary mistake people make?

This one’s easy: filing your taxes late if you don’t need to.

This year, more than probably any in our lifetimes, it feels like there’s a good excuse to file your taxes late. But the truth is they’re already late. The original deadline was April 30. Because of the pandemic, the tax authorities extended it to June 1st. And there’s even more cushion built in: in 2020, you don’t have to pay any taxes owing until September 1st.

It’s in your best interest to hit that deadline if at all possible. First, most Canadians have refunds coming to them. But if you miss the deadline, the CRA will hold your refund hostage — as well as any tax credits you share with a spouse or dependents.

And if you miss the deadline and do owe taxes, you’ll be subject to monetary penalties. And they’re steep — starting with 5% on the amount you owe. Bottom line: delaying is just going to be more expensive.

Should I file my own taxes or pay someone to prepare them while I do some oil painting?

The first question to answer here is: how good at oil painting are you? And the more important question is: what would you be hiring a tax preparer to do? For most people it’s because they a preparer is going to do the legwork for them, or get them a better refund, or hopefully both. That’s an OK assumption for some, but for most of us it’s not.

Let’s start with some good reasons to hire a professional tax preparer.

  • You have multiple businesses with lots of complicated transactions or you’re self-employed with a basement full of paperwork. Arduous returns may be worth farming out. But professionals at accounting firms generally charge between $100 and $500 per hour. Would you sort through your own materials for $100-$500 an hour? Therein lies your answer.

  • You have multiple brokerage accounts with international stocks and lots of complicated trades.

  • Your last name is Trump or you suspect you might have shell companies registered in your name in the Cayman Islands. Good luck!

Here are some reasons, on the other hand, you should do them yourself:

  • You’re going to have to collect all the pertinent documents whether you’re hiring someone or not.

  • There are great online tools (like SimpleTax) designed to get you the best outcome possible — and the confidence that your return is done right.

  • A live human is likely going to charge a minimum of $100 (and an experienced accountant will likely charge multiples of that). If you choose to use a tax preparation software, it’ll run you between $0 and $65.

  • And, we would be remiss not to add that with SimpleTax you can pay whatever you think is fair regardless of how complicated your taxes are, even nothing.

If I got married (or common-law married) do I need to do anything?

Once you’re done basking in newlywed or common-law bliss, declare your new status to the CRA. They won’t send you a soup spoon or punch bowl, sadly, but your eligibility for certain credits (like the GST/HST credit which offsets sales tax) will now be calculated using your new, combined income — which usually means a smaller tax credit. If you forget to declare your status and collect more credit than you should, the CRA may come calling, and then you’ll have to give those funds back.

But it’s not all bad news, as a couple with a combined income and expenses you’ll also be able to optimize your returns. Let us explain:

Certain credits can be transferred from one spouse to the other, so if the spouse with a lower income isn’t able to fully benefit from a credit (like the basic personal income or tuition credit) the higher earner can claim it and help offset his or her income. And certain shared expenses can be combined — like medical expenses or charitable donations — and claimed by just one person for a higher total refund than if they were split.

Another benefit of your happy union is that you can now open a joint RRSP account — called a Spousal RRSP. This is an especially good option if one spouse has a much higher income than the other, because it lets you contribute to your partner’s RRSP — so one of you doesn’t end up with a much bigger account than the other. Why does that matter? In the short term, it doesn’t change a thing — every dollar you contribute lowers your taxable income. But down the road in retirement it makes a big difference. Let us explain.

Say you don’t take advantage of a Spousal RRSP and in retirement you end up with $1.5 million in your RRSP, and your spouse has $200,000. When it comes time to withdraw (let’s say at the standard rate of 4%) you will be getting $60,000 in income a year from your RRSP, compared to $12,000 for your spouse. That puts you in a much higher average tax rate — and nobody wants that. If you open a Spousal RRSP, you could contribute to your partner’s account and even out the amounts in your account — keeping you both in a lower tax bracket. And there are even more benefits of a Spousal RRSP: you can read about them here.

I had a kid this year! What does that mean for my taxes?

Congratulations! What you lack in sleep you will make up in credits and tax deductions. (And of course fulfillment and joy). A few of those exciting benefits to look forward to are:

  • The Canada child benefit: A tax-free monthly benefit that you can apply for as soon as your child is born to help offset the many expenses that come with having a kid. Just apply once per kiddo and keep filing your taxes every year and the benefit is yours. Learn more here.

  • Claiming child care expenses: You can deduct the amount you paid for childcare, nannies, or daycare on your tax return, as long as the childcare is freeing you up to earn an income — just add them to your tax return. The amount you can claim depends on your income and the number of kids you have.

  • New CARE child benefit, for residents of Ontario only: On top of the child care expenses you can write off, you may also be eligible for the CARE benefit, which gives families a refund for their childcare expenses.

  • There are also many provincial credits and benefits (like GST) that may increase once you have a kid, and increase with each subsequent child you have. You can find out more about that here.

One more non-tax related piece of advice: open a Registered Education Savings Plan (RESP)! This is where you can sock money away for post-secondary institutions with one enormous benefit: the government will match your contributions up to a certain amount each year. You can learn more about that here.

Will buying a home effect my filing?

Yep, it sure will, and it’s stuff you’ll want to take advantage of. First, if you bought a home in 2019, there’s something called the “home buyer’s amount,” that allows you to claim $5,000 on your tax return the year you bought your home, which could reduce your taxes by $750.

If you’re planning ahead and thinking of buying a home in 2020, there’s also the Home Buyer’s Plan. How does it work? Well, if you have funds in your RRSP, you can withdraw up to $35,000 tax-free to put towards the purchase of your home — you just have to make sure to add them back within 15 years.

How do I deal with my side-hustle income?

If you — like one in three Canadians — do work outside of your primary job, don’t forget you have to report the income on your tax return. That extra money will most likely be considered self-employment income, so you’ll need to complete a T2125 form. Just enter what you earned and deduct expenses you incurred to earn it (like paying for a metro card to commute, or gas for your car).

What’s the smartest way to use my refund?

The big question. We’ve said it in the past and we’ll say it again: the best thing to do with your refund is invest. We suggest a portfolio of well-diversified assets that keep fees as low as possible. (Hint: like our Wealthsimple Invest portfolios!) If you’re choosing between putting your refund into a TFSA or an RRSP, you should know that they have very different tax implications:

  • If you deposit your refund in an RRSP, you won’t have to pay income tax on that money at tax time next year.  This ultimately means keeping more money in your pocket. But that also means you won’t be able to access it until retirement.

  • The money you earn in a TFSA is tax-free. This means any interest, dividends, or capital gains earned have no tax consequences, and you won’t have to report it on a future tax return. And you also get to withdraw it with no tax consequences!

Not sure which to choose? Here’s a simple way to think about: if you’ll likely be in a lower tax bracket when you retire, an RRSP might be the best choice; if you’ll be in the same tax bracket when you retire and withdraw the money, a TFSA may the better choice.

That’s it! Happy tax-ing.

Wealthsimple uses technology and smart, friendly humans to help you grow and manage your money. Invest, save, trade, and even do your taxes in a better, simpler way.

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"MY UNDERGRADUATE ADVISER TOLD ME I SHOULD JUST FORGET ABOUT THE WHOLE WRITING THING. ‘YOU SHOULD FIND A GOOD MAN AND GET MARRIED,’ HE TOLD ME."

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